Future LNG And Data Center Dependence Will Pressure Margins And Earnings

Catalysts

About Baker Hughes

Baker Hughes is an energy technology company that provides equipment, services and digital solutions across the oil, gas and broader energy infrastructure value chain.

What are the underlying business or industry changes driving this perspective?

• Heavy concentration of current growth on LNG and gas infrastructure projects, such as large QatarEnergy contracts and the San Matias Pipeline, leaves future revenue exposed if project approvals, maintenance schedules or export flows slow. This would pressure IET equipment orders and related services revenue.
• The multiyear build out of data center power and behind the meter generation, including 1 gigawatt and 1.21 gigawatt generator awards, is already stretching NovaLT turbine capacity through 2028. Any slowdown in data center demand or customer deferrals would leave Baker Hughes with elevated fixed costs and potential pressure on IET net margins.
• Global power demand growth and rising focus on energy security are supporting record Power Systems and grid stability orders today. If governments or utilities temper spending on grid redundancy, synchronous condensers and energy storage after the current investment wave, the company could face lower long cycle backlog conversion and softer earnings growth from IET.
• The planned acquisition of Chart and rapid portfolio reshaping, including multiple divestitures and an HMH IPO, add integration and execution risk at a time when Baker Hughes is relying on US$325 million of cost synergies and US$3 billion of gross proceeds to support its balance sheet. Any integration setbacks or weaker synergy capture would weigh on EBITDA margins.
• Dependence on heightened geopolitical risk, energy security concerns and higher upstream investment outside the Middle East as long term demand drivers means that any moderation in investment across U.S., Latin America and deepwater regions could reduce OFSE activity levels. This would limit the company’s ability to sustain EBITDA at the guided range.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Baker Hughes compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Baker Hughes's revenue will grow by 1.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 11.2% today to 8.8% in 3 years time.
• The bearish analysts expect earnings to reach $2.6 billion (and earnings per share of $2.62) by about May 2029, down from $3.1 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $3.6 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 25.6x on those 2029 earnings, up from 20.4x today. This future PE is lower than the current PE for the US Energy Services industry at 26.6x.
• The bearish analysts expect the number of shares outstanding to grow by 0.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.68%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Record IET orders of $4.9b in the quarter, a five quarter streak of record remaining performance obligations of $33.1b and guidance that IET orders could reach at least $14.5b for 2026 and potentially exceed $40b by 2028 indicate a long-term backlog that could support equipment revenue and associated service revenue more than the bearish view implies, which would support revenue and earnings.
• Power Systems is already securing large, multi-year awards tied to data center growth, grid stability and energy storage, and management is expanding NovaLT and BRUSH capacity and highlighting a growing installed base that feeds life cycle services, which could support higher long term revenue and more resilient net margins than assumed in a bearish case.
• The company is repositioning around industrialized energy solutions, including LNG, gas infrastructure, carbon capture, geothermal and digital optimization tools like Cordant and Leucipa, and these areas are already generating sizeable new energy and digital bookings, which could support diversified revenue streams and help stabilize margins and earnings.
• Portfolio reshaping via divestitures such as PSI, SPC, Waygate and the HMH IPO, combined with the planned Chart acquisition and identified cost synergies of $325m, is aimed at improving capital allocation and focusing on higher life cycle and critical applications, which could contribute to stronger EBITDA margins and earnings than the bearish scenario assumes.
• A very strong balance sheet with net debt to adjusted EBITDA of 0.3x, liquidity of $17.8b and access to bond markets in both the U.S. and Europe provides financial flexibility to invest through cycles, manage geopolitical shocks such as the Middle East conflict and support integration of Chart, which could reduce downside risk to revenue, margins and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Baker Hughes is $52.3, which represents up to two standard deviations below the consensus price target of $70.81. This valuation is based on what can be assumed as the expectations of Baker Hughes's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $85.0, and the most bearish reporting a price target of just $48.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $29.2 billion, earnings will come to $2.6 billion, and it would be trading on a PE ratio of 25.6x, assuming you use a discount rate of 7.7%.
• Given the current share price of $64.12, the analyst price target of $52.3 is 22.6% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.